The Bryant Gumbel Company replaces old boat parts ...

The Bryant Gumbel Company replaces old boat parts with new Coast Guard approved modern parts on existing boats at marinas. Because they are looking at some additional financing the company is in the process of preparing its annual financial statements for the fiscal year ended May 31, 2011, and Bryant Gumbel, controller for Bryant Gumbel, has gathered the following data concerning inventory.

At May 31, 2011, the balance in The Bryant Gumbel Company’s Raw Material Inventory account was $408,000, and the Allowance to Reduce Inventory to Market had a credit balance of $29,500.

Gumbel summarized the relevant inventory cost and market data at May 31, 2011, in the schedule below. Gumbel assigned you, an intern from UOP, the task of calculating the amount that should appear on Gumbel ‘s May 31, 2011, financial statements for inventory under the lower of cost or market rule as applied to each item in inventory. Having taking ACC 422 you have expressed concern over departing from the cost principle.

 

Replacement                                                           Net Realizable

Cost                  Cost                        Sales Price               Value              Normal Profit

 

Boat                $ 70,000        $ 62,500                     $ 64,000                    $ 56,000                    $ 5,100

Motors

 

Oak Flooring    86,000           79,400                         94,000                        84,800                       7,400

For Decks

 

Rudders            112,000        124,000                        186,400                      168,300                     18,500

 

Storm                140,000        122,000                         154,800                     140,000                      15,400

Windows

 

Total                 $408,000      $387,900                     $499,200                  $449,100                   $46,400

 

 

OK here is what you need to do, first determine the proper balance in the Allowance to Reduce Inventory to Market at May 31, 2011, next for the fiscal year ended May 31, 2011, determine the amount of the gain or loss that would be recorded due to the change in the Allowance to Reduce Inventory to Market and finally, explain the rationale for the use of the lower of cost or market rule as it applies to inventories.


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